From High-Frequency Trading to High-Touch Trading
IPC’s Jonathan Morton discusses the role of voice communication systems an the world of high frequency trading.
It seems like everyone defines “high frequency trading” slightly differently. Ask ten industry veterans and you will get ten variations on a similar concept. While it may be difficult to pin down an exact definition of high frequency trading, there are definite characteristics that help define the trading strategy. High frequency trading depends on speed of execution and ultralow latency.
High frequency trading involves the large-scale turnover of numerous positions, making a small return on each turnover. Traders use intricate algorithms that are based on good models run on fast computational technology to calculate and run the models, executed on a high speed basis.
Although even as high frequency trading continues to grow in popularity, there are still calls for high-touch trading activities that utilize voice communication systems. In trading derivatives, for example, voice communications is a key component. It has been hypothesized that the move to electronic execution systems could lead to a sharp decline in voice trading on many trading floors.
On the contrary, the role of voice communications continues to play a significant part in the trade lifecycle. High-monetary value trades demand a certain amount of voice interaction from multiple parties in order to formulate a decision on an execution process. If the trading of OTC derivatives is moved to new swap execution facilities, traders will still need to rely on voice solutions for sharing information and collaboration between traders and other experts within their organizations.
To truly understand the importance of collaboration across the various entities on a trading floor, it is first necessary to note the environment in which a trader operates. Traders communicate constantly with sales traders, clients, research analysts, portfolio managers and financial advisors, constantly working to meet the needs of the firm, stay in sync with the strategy of their desk and make money for their clients.
A trading floor communication system is a critical component in enabling this communication and collaboration. There is an extensive array of required capabilities, ranging from voice facilities, such as intercom and archival systems, to integration with the PC applications traders use, such as CRM, OMS and market data applications.
Integration with other systems and applications using industry and open standards is becoming increasingly critical in allowing traders to work efficiently and maximize their productivity. When a volatile market environment is layered with real-time electronic information feeds and multiple, complex financial instruments, it becomes challenging for traders to facilitate all of the steps needed to execute a trade. Numerous members of the trading community, be they product experts, analysts, risk managers or brokers, are continuously involved in negotiating for the best price to ensure that the final transaction is viable for both the customer and the trading institution.
As each trade moves across the trade lifecycle from the front to back office, it touches multiple members. The result is an increasing demand for transparency from compliance teams, for more efficient and direct communication across both, the trading floor and the enterprise, as they establish and execute strategies. Systems that provide the middle and back office staff with access to the same private lines used by traders, help enhance voice communication with the front office.
Using industry standards, line sharing across the trading floor enables traders to instantly access the appropriate team members on a call. This, in turn, provides greater transparency for compliance team members as they can easily be kept “in the loop” on each trade by connecting more efficiently to traders within their firm. In the high stakes world of trading, optimized voice communications technology and streamlined workflows enhance efficiency and collaboration within organizations.
Prior to executing a high-monetary multilateral trade, a significant percentage of traders use a combination of electronic and voice trading systems to gather information and market color from other market participants and to collaborate with other members in their company’s network. Newer trading platforms seamlessly integrate Voice over Internet Protocol (VoIP) for direct market access, spanning multiple asset classes to execute high-frequency trades swiftly.
The combination of low-touch and high-touch trading systems for financial services firms creates numerous opportunities with significant advantages for all trading participants. The future trading floor will look to leverage both strategies for success and ultimately, improve a firm’s operations.